NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation and Presentation
— The consolidated financial statements include the accounts of Marine Products Corporation (a Delaware corporation)
and its wholly owned subsidiaries (“Marine Products” or the “Company”). Marine Products, through Chaparral
Boats, Inc. (“Chaparral”) and Robalo Acquisition Company LLC (“Robalo”), operates as a manufacturer of
fiberglass powerboats and related products and services to a broad range of consumers worldwide.
The consolidated financial statements included
herein may not necessarily be indicative of the future results of operations, financial position and cash flows of Marine Products.
The Company has only one reportable segment
— its Powerboat Manufacturing business. The Company’s results of operations and its financial condition are not significantly
reliant upon any single customer or product model. No single dealer accounted for more than 10 percent of net sales during 2017,
2016 or 2015. Net sales to the Company’s international dealers were approximately $17 million in 2017, $21 million in 2016,
and $22 million in 2015.
Nature of Operations
— Marine
Products is principally engaged in manufacturing powerboats and providing related products and services. Marine Products distributes
fiberglass recreational boats through a network of domestic and international independent dealers.
Common Stock
— Marine Products
is authorized to issue 74,000,000 shares of common stock, $0.10 par value. Holders of common stock are entitled to receive dividends
when, as, and if declared by our Board of Directors out of legally available funds. Each share of common stock is entitled to one
vote on all matters submitted to a vote of stockholders. Holders of common stock do not have cumulative voting rights. In the event
of any liquidation, dissolution or winding up of the Company, holders of common stock are entitled to ratable distribution of the
remaining assets available for distribution to stockholders.
Preferred Stock
— Marine Products
is authorized to issue up to 1,000,000 shares of preferred stock, $0.10 par value. As of December 31, 2017, there were no shares
of preferred stock issued. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the
issuance of preferred stock as a class without series or, if so determined from time to time, in one or more series, and by filing
a certificate pursuant to the applicable laws of the state of Delaware and to fix the designations, powers, preferences and rights,
exchangeability for shares of any other class or classes of stock. Any preferred stock to be issued could rank prior to the common
stock with respect to dividend rights and rights on liquidation.
Share Repurchases
— The Company
records the cost of share repurchases in stockholders’ equity as a reduction to common stock to the extent of par value of
the shares acquired and the remainder is allocated to capital in excess of par value and retained earnings if capital in excess
of par value is depleted. The Company tracks capital in excess of par value on a cumulative basis and for each reporting period,
discloses the excess over capital in excess of par value as part of stock purchased and retired in the consolidated statements
of stockholders’ equity.
Dividend
— On January 23, 2018,
the Board of Directors declared a 43 percent increase to the regular cash dividend from $0.07 per share to $0.10 per share payable
March 9, 2018 to stockholders of record at the close of business on February 9, 2018. Subject to industry conditions and Marine
Products’s earnings, financial condition, and other relevant factors, the Company expects to continue to pay regular quarterly
cash dividends to common stockholders.
Use of Estimates in the Preparation of
Financial Statements
— The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of sales and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are
used in the determination of sales incentives and discounts, warranty costs, and income taxes.
Sales Recognition
— Marine
Products recognizes sales when a fully executed agreement exists, prices are established, products are delivered to the dealer
in the case of domestic dealers and collectability is reasonably assured. See “Deferred Revenue” below for recognition
of sales to international dealers.
Deferred Revenue
— Marine Products
requires payment from international dealers and some domestic dealers prior to shipment of products to these dealers. Amounts received
from these dealers toward the purchase of boats are classified as deferred revenue and recognized as sales when the products are
shipped.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
Shipping and Handling Charges
—
The shipping and handling of the Company’s products to dealers is handled through a combination of third-party marine transporters
and a company owned fleet of delivery trucks. Fees charged to customers for shipping and handling are included in net sales in
the accompanying consolidated statements of operations and the related costs incurred by the Company are included in cost of goods
sold.
Advertising
— Advertising expenses
are charged to expense during the period in which they are incurred. Expenses associated with product brochures and other inventoriable
marketing materials are deferred and amortized over the related model year which approximates the consumption of these materials.
As of December 31, 2017 and 2016, the Company had approximately $342,000 and $271,000 in prepaid expenses related to unamortized
product brochure costs. Advertising expenses totaled approximately $2,305,000 in 2017, $2,545,000 in 2016 and $2,480,000 in 2015
and are recorded in selling, general and administrative expenses.
Sales Incentives and Discounts
—
Sales incentives including dealer discounts and retail sales promotions are provided for and recorded as a reduction of sales or
as a cost of sales as appropriate. The Company records the estimated cost of these incentives at the later of the recognition of
the related sales or the announcement of a promotional program.
Cash and Cash Equivalents
—
Highly liquid investments with original maturities of three months or less when acquired are considered to be cash equivalents.
The Company maintains its cash in bank accounts, which at times, may exceed federally insured limits.
Marketable Securities
— Marine
Products maintains investments at a large, well-capitalized financial institution. Marine Products’ investment policy does
not allow investment in any securities rated less than “investment grade” by national rating services.
Management determines the appropriate classification
of debt securities at the time of purchase and re-evaluates such designations as of each balance sheet date. Debt securities are
classified as available-for-sale because the Company does not have the intent to hold the securities to maturity. Available-for-sale
securities are stated at their fair values, with the unrealized gains and losses, net of taxes, reported as a separate component
of stockholders’ equity. The cost of securities sold is based on the specific identification method. Realized gains and losses,
declines in value judged to be other than temporary, interest and dividends on available-for-sale securities are included in interest
income. Net realized gains (losses) on marketable securities totaled $30,000 in 2017, ($39,000) in 2016 and $45,000 in 2015. Of
the total gains (losses) realized, reclassification from other comprehensive income totaled approximately $30,000 in 2017, ($39,000)
in 2016, and $45,000 in 2015. There were no gross unrealized gains on marketable securities as of December 31, 2017 and $4,000
as of December 31, 2016. Gross unrealized losses on marketable securities totaled $70,000 as of December 31, 2017 and $53,000 as
of December 31, 2016. The amortized cost basis, fair value and net unrealized loss of the available-for-sale securities are as
follows:
December 31,
|
|
2017
|
|
|
2016
|
|
Type of Securities
|
|
Amortized
Cost Basis
|
|
|
Fair
Value
|
|
|
Net
Unrealized
Loss
|
|
|
Amortized
Cost
Basis
|
|
|
Fair
Value
|
|
|
Net
Unrealized
Loss
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Obligations
|
|
$
|
13,101
|
|
|
$
|
13,031
|
|
|
$
|
(70
|
)
|
|
$
|
9,379
|
|
|
$
|
9,330
|
|
|
$
|
(49
|
)
|
Corporate Obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
13,101
|
|
|
$
|
13,031
|
|
|
$
|
(70
|
)
|
|
$
|
9,379
|
|
|
$
|
9,330
|
|
|
$
|
(49
|
)
|
Municipal debt obligations consist primarily
of municipal notes rated AA- or higher ranging in maturity from less than one year to over 10 years. Investments with remaining
maturities of less than 12 months are considered to be current marketable securities. Investments with remaining maturities greater
than 12 months are considered to be non-current marketable securities. The Company’s non-current marketable securities as
of December 31, 2017 are scheduled to mature between 2019 and 2047.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
Accounts Receivable
— The majority
of the Company’s accounts receivable is due from dealers located in markets throughout the United States. Approximately 74
percent of Marine Products’ domestic shipments are made pursuant to “floor plan financing” programs in which
Marine Products’ subsidiaries participate on behalf of their dealers with various major third-party financing institutions.
Under these arrangements, a dealer establishes lines of credit with one or more of these third-party lenders for the purchase of
boat inventory for sales to retail customers in their show room or during boat show exhibitions. When a dealer purchases and takes
delivery of a boat pursuant to a floor plan financing arrangement, it draws against its line of credit and the lender pays the
invoice cost of the boat directly to Marine Products within approximately ten business days. The Company determines its allowance
for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due,
the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition
of the general economy and the industry as a whole. The Company writes-off accounts receivable when they become uncollectible,
and payments subsequently received on such receivables are credited to the allowance.
Inventories
— Inventories are
stated at the lower of cost (determined on a first-in, first-out basis) and net realizable value. When evidence exists that the
net realizable value of inventory is lower than its cost, the Company recognizes the difference as a loss in earnings in the period
in which it occurs. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable
costs of completion, disposal, and transportation.
Property, Plant and Equipment
—
Property, plant and equipment is carried at cost. Depreciation is provided principally on a straight-line basis over the estimated
useful lives of the assets. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated
from the accounts in the year of disposal with the resulting gain or loss credited or charged to income. Expenditures for additions,
major renewals, and betterments are capitalized while expenditures for routine maintenance and repairs are expensed as incurred.
Depreciation expense on operating equipment used in production is included in cost of goods sold in the accompanying consolidated
statements of operations. All other depreciation is included in selling, general and administrative expenses in the accompanying
consolidated statements of operations. Property, plant and equipment are reviewed for impairment when indicators of impairment
exist.
Goodwill and Other Intangibles
—
Intangibles consist primarily of goodwill and trade names related to businesses acquired. Goodwill represents the excess of the
purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill was $3,308,000 as of December
31, 2017 and 2016. The Company evaluates whether goodwill is impaired by comparing its market capitalization based on its closing
stock price (Level 1 input) to the book value of its equity on the annual evaluation date. The Company also periodically performs
a valuation of its trade names and has concluded that the fair value of these assets is not impaired. Based on these evaluations,
the Company concluded that no impairment of its goodwill or trade names has occurred for the years ended December 31, 2017, 2016
and 2015.
Investments
— The Company maintains
certain securities in the non-qualified Supplemental Executive Retirement Plan that have been classified as trading. See Note 10
for further information regarding these securities.
Warranty Costs
— The Company
provides a lifetime limited structural hull warranty, a five-year limited structural deck warranty, and a transferable one-year
limited warranty to the original owner. Warranties for additional items are provided for periods of one to five years and are not
transferrable. Additionally, as it relates to the first subsequent owner, a five-year transferrable hull warranty and the remainder
of the original one-year limited warranty on certain components are available. The five-year transferable hull warranty terminates
five years after the date of the original retail purchase. Claim costs related to components are generally absorbed by the original
component manufacturer. The Company accrues for estimated future warranty costs at the time of the sale based on its historical
claims experience. An analysis of the warranty accruals for the years ended December 31, 2017 and 2016 is as follows:
(in thousands)
|
|
2017
|
|
|
2016
|
|
Balance at beginning of year
|
|
$
|
4,629
|
|
|
$
|
3,405
|
|
Less: Payments made during the year
|
|
|
(2,599
|
)
|
|
|
(2,856
|
)
|
Add: Warranty provision for the current year
|
|
|
3,436
|
|
|
|
3,527
|
|
Changes to warranty provision for prior years
|
|
|
(93
|
)
|
|
|
553
|
|
Balance at end of year
|
|
$
|
5,373
|
|
|
$
|
4,629
|
|
Insurance Accruals
— The Company
fully insures its risks related to general liability, product liability, workers’ compensation, and vehicle liability, whereas
the health insurance plan is self-funded up to a maximum annual claim amount for each covered employee and related dependents.
The estimated cost of claims under the self-insurance program is accrued as the claims are incurred and may subsequently be revised
based on developments relating to such claims.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
Research and Development Costs
—
The Company expenses research and development costs for new products and components as incurred. Research and development costs
are included in selling, general and administrative expenses and totaled $960,000 in 2017, $858,000 in 2016, and $663,000 in 2015.
Repurchase Obligations
— The
Company has entered into agreements with third-party floor plan lenders where it has agreed, in the event of default by the dealer,
to repurchase MPC boats repossessed from the dealer. These arrangements are subject to maximum repurchase amounts and the associated
risk is mitigated by the value of the boats repurchased. The Company accrues estimated losses when a loss, due primarily to the
default of one of our dealers, is determined to be probable and the amount of the loss is reasonably estimable.
Income Taxes
— Deferred tax
liabilities and assets are determined based on the difference between the financial and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected to reverse. The newly enacted Tax Cuts and Jobs
Act required the revaluation of our deferred tax assets and liabilities to reflect the change in Federal income tax rates from
35 percent to 21 percent. The Company’s net deferred tax asset as of December 31, 2017 has been reduced through a discrete
income tax provision adjustment of $1.7 million related to this rate change. The Company establishes a valuation allowance against
the carrying value of deferred tax assets if the Company concludes that it is more likely than not that the asset will not be realized
through future taxable income.
Stock-Based Compensation
—
Stock-based compensation expense is recognized for all share-based payment awards, net of an estimated forfeiture rate. Thus, compensation
cost is amortized for those shares expected to vest on a straight-line basis over the requisite service period of the award. See
Note 10 for additional information.
Earnings per Share
— Basic
and diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during
the respective periods. In addition, the Company has periodically issued share-based payment awards that contain non-forfeitable
rights to dividends and are therefore considered participating securities. See Note 10 for further information on restricted stock
granted to employees.
Restricted shares of common stock (participating
securities) outstanding and a reconciliation of weighted average shares outstanding is as follows:
(In thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net income available for stockholders
|
|
$
|
19,300
|
|
|
$
|
16,745
|
|
|
$
|
14,306
|
|
Less: Adjustments for earnings attributable to participating securities
|
|
|
(595
|
)
|
|
|
(535
|
)
|
|
|
(464
|
)
|
Net income used in calculating earnings per share
|
|
$
|
18,705
|
|
|
$
|
16,210
|
|
|
$
|
13,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (including participating securities)
|
|
|
34,843
|
|
|
|
37,857
|
|
|
|
36,955
|
|
Adjustment for participating securities
|
|
|
(1,091
|
)
|
|
|
(1,224
|
)
|
|
|
(1,252
|
)
|
Shares used in calculating basic earnings per share
|
|
|
33,752
|
|
|
|
36,633
|
|
|
|
35,703
|
|
Dilutive effect of stock based awards
|
|
|
—
|
|
|
|
—
|
|
|
|
192
|
|
Shares used in calculating diluted earnings per share
|
|
|
33,752
|
|
|
|
36,633
|
|
|
|
35,895
|
|
Fair Value of Financial Instruments
—
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable
and marketable securities. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate
their fair values because of the short-term nature of such instruments. The Company’s marketable securities are classified
as available-for-sale securities with the exception of investments held in the non-qualified Supplemental Executive Retirement
Plan (“SERP”) which are classified as trading securities. All of these securities are carried at fair value in the
accompanying consolidated balance sheets. See Note 8 for further information regarding the fair value measurement of assets and
liabilities.
Concentration of Suppliers
—
The Company has only four suppliers for the three types of engines it purchases. This concentration of suppliers could impact our
sales and profitability in the event of a sudden interruption in the delivery of these engines.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
Recent Accounting Pronouncements
During the year ended December 31, 2017, the FASB issued the
following Accounting Standards Updates (ASUs):
Recently Adopted Accounting Pronouncements:
|
·
|
Accounting Standards Update (ASU) No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory.
Current
requirements are to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or
net realizable value less an approximated normal profit margin. These amendments allow inventory to be measured at lower of cost
or net realizable value and eliminates the market requirement. Net realizable value is the estimated selling price in the ordinary
course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted these provisions
in the first quarter of 2017 on a prospective basis. The
adoption of these provisions did not
have a material impact on the Company’s consolidated financial statements.
|
|
·
|
ASU No. 2016-09,
Compensation —Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
T
he amendments simplify several aspects of the accounting for share-based payment award transactions,
requiring excess tax benefits and deficiencies to be recognized as a component of income tax expense rather than equity.
This guidance also requires excess tax benefits and deficiencies to be presented as an operating activity on the statement of cash
flows and allows an entity to make an accounting policy election to either estimate expected forfeitures or to account for them
as they occur.
The Company will continue to estimate expected forfeitures. The Company adopted these
provisions in the first quarter of 2017 on a prospective basis. See Notes on Stock-Based Compensation and Income Taxes for the
effect of adoption on the financial statements.
|
Recently Issued Accounting Pronouncements Not Yet Adopted:
To be adopted in 2018:
REVENUE RECOGNITION:
In May 2014, the Financial Accounting Standards
Board ("FASB") issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers (Topic
606)
. The provisions of this ASU require entities to recognize revenue to depict transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. The standard creates a five step model that requires companies to exercise judgment when considering the terms of a contract
and all relevant facts and circumstances. The standard allows for either a full retrospective adoption in which the standard is
applied to all of the periods presented, or a modified retrospective adoption in which the standard is applied only to the most
current period presented in the financial statements with a cumulative-effect adjustment reflected in retained earnings. The standard
also requires expanded disclosures regarding the qualitative and quantitative information of an entity's nature, amount, timing
and uncertainty of revenue and cash flows arising from contracts with customers. This new revenue recognition standard will be
effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.
Current Status of implementation:
The Company has completed a comprehensive
review of a representative sample of contracts with customers. As part of planning for the adoption of this new accounting standard,
the Company has prepared technical accounting memorandums, drafted new formal accounting policies, evaluated the impact of the
standard will have on our control environment, and is currently working on refining required disclosures. The Company adopted the
standard on January 1, 2018 using the modified retrospective method and the cumulative-effect adjustment to retained earnings upon
adoption is immaterial. However, the revenue specific disclosures will be significantly expanded beginning in 2018.
Other Pronouncements:
|
·
|
ASU No. 2016-01,
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets
and Financial Liabilities.
The amendments make targeted improvements to existing U.S. GAAP and affects accounting for equity
investments and financial instruments and liabilities and related disclosures. The amendments are effective starting in the first
quarter of 2018, with early adoption permitted for certain provisions. The Company does not expect the adoption of these provisions
to have a material impact on its consolidated financial statements.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
|
·
|
ASU
No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
The
amendments provide guidance in the presentation and classification of certain cash receipts and cash payments in the statement
of cash flows including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination,
proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and
distributions received from equity method investees. The amendments are effective starting in the first quarter of 2018 with early
adoption permitted. The amendments should be applied using a retrospective transition method to each period presented. If it is
impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied
prospectively as of the earliest date practicable.
The Company does not expect the adoption of these
provisions to have a material impact on its consolidated financial statements.
|
|
·
|
ASU No. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.
The amendments require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other
than inventory when the transfer occurs. The amendments eliminate the exception for an intra-entity transfer of an asset other
than inventory. Two common examples of assets included in the scope of the amendments are intellectual property and property, plant,
and equipment. The amendments do not include new disclosure requirements; however, existing disclosure requirements might be applicable
when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. The amendments
are effective starting in the first quarter of 2018 with early adoption permitted. The amendments are required to be applied on
a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the
period of adoption. The Company does not expect the adoption of these provisions to have a material impact on its consolidated
financial statements.
|
|
·
|
ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business.
The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions,
disposals, goodwill, and consolidation. The amendments provide a more robust framework to use in determining when a set of assets
and activities is a business. They also provide more consistency in applying the guidance, reduce the costs of application, and
make the definition of a business more operable. The amendments are effective beginning in the first quarter of 2018 with early
application permitted under certain circumstances. The Company expects to adopt these provisions as it completes future acquisitions
and does not expect the adoption to have a material impact on its financial statements.
|
|
·
|
ASU No. 2017-09 —
Compensation —Stock Compensation (Topic 718): Scope of Modification
Accounting.
The provisions are applicable when there are changes to the terms or conditions of a share-based payment award.
The amendments require an entity to apply modification accounting for the effects of changes to the terms and conditions of a share-based
payment award unless certain conditions including fair value, vesting conditions and classification are met. The amendments are
effective beginning in the first quarter of 2018 with early application permitted under certain circumstances. The Company does
not expect the adoption of these provisions to have a material impact on its consolidated financial statements.
|
To be adopted in 2019 and later:
|
·
|
ASU No. 2016-02 —
Leases (Topic 842).
Under the new guidance, lessees will need to recognize a right-of-use
asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease),
at the commencement of the lease term. The liability will be equal to the present value of lease payments. The asset will be based
on the liability, subject to adjustment, such as for initial direct costs. The amendments in this standard are effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees
(for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in
the financial statements. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently
evaluating the impact of adopting these provisions on its consolidated financial statements.
|
|
·
|
ASU No. 2016-13,
Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
T
he amendments require the credit losses on available-for-sale debt securities and purchased
financial assets with credit deterioration should presented as an allowance rather than a write-down. It also allows recording
of credit loss reversals in current period net income. The amendments are effective starting in the first quarter of 2020 with
early application permitted a year earlier. The Company is currently evaluating the impact of adopting these provisions on its
consolidated financial statements.
|
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
|
·
|
ASU No. 2017-04
—Intangibles —Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment.
To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from
the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting
unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the
reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that
reporting unit. The amendments are effective for annual or any interim goodwill impairment tests beginning in 2020 applied on a
prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after
January 1, 2017. The Company is currently evaluating the impact of adopting these provisions on its consolidated financial statements.
|
|
·
|
ASU No. 2017-08 —
Receivables —Nonrefundable Fees and Other Costs (Subtopic 310-20):
Premium Amortization on Purchased Callable Debt Securities.
The amendments shorten the amortization period for certain
callable debt securities held at a premium and requires the premium to be amortized to the earliest call date. However, the amendments
do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The
amendments are effective starting in the first quarter of 2019 with early application permitted. The amendments are to be applied
on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the
period of adoption. The entity is required to provide disclosures about a change in accounting principle in the period of adoption.
The Company is currently evaluating the impact of adopting these provisions on its consolidated financial statements.
|
NOTE 2: ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
December 31,
|
|
2017
|
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
$
|
1,377
|
|
|
$
|
744
|
|
Other
|
|
|
1,699
|
|
|
|
368
|
|
Total
|
|
|
3,076
|
|
|
|
1,112
|
|
Less: allowance for doubtful accounts
|
|
|
(25
|
)
|
|
|
(25
|
)
|
Net accounts receivable
|
|
$
|
3,051
|
|
|
$
|
1,087
|
|
Trade receivables consist primarily of balances
related to the sales of boats which are shipped pursuant to “floor-plan financing” programs with qualified lenders.
Other receivables consist primarily of rebate receivables from various suppliers. Changes in the Company’s allowance for
doubtful accounts are disclosed in Schedule II on page 61 of this report.
NOTE 3: INVENTORIES
Inventories consist of the following:
December 31,
|
|
2017
|
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
20,116
|
|
|
$
|
26,106
|
|
Work in process
|
|
|
8,300
|
|
|
|
9,007
|
|
Finished goods
|
|
|
9,590
|
|
|
|
7,375
|
|
Total inventories
|
|
$
|
38,006
|
|
|
$
|
42,488
|
|
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are presented
at cost, net of accumulated depreciation, and consist of the following:
December 31,
|
|
Estimated
Useful Lives
|
|
2017
|
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
N/A
|
|
$
|
878
|
|
|
$
|
878
|
|
Buildings
|
|
7-40
|
|
|
19,611
|
|
|
|
18,314
|
|
Operating equipment and property
|
|
3-15
|
|
|
10,360
|
|
|
|
10,070
|
|
Furniture and fixtures
|
|
5-7
|
|
|
1,488
|
|
|
|
1,535
|
|
Vehicles
|
|
5-10
|
|
|
6,276
|
|
|
|
6,007
|
|
Gross property, plant and equipment
|
|
|
|
|
38,613
|
|
|
|
36,804
|
|
Less: accumulated depreciation
|
|
|
|
|
(24,395
|
)
|
|
|
(23,470
|
)
|
Net property, plant and equipment
|
|
|
|
$
|
14,218
|
|
|
$
|
13,334
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
Depreciation expense was $1,526,000
in 2017, $1,382,000 in 2016 and $1,013,000 in 2015. The Company’s accounts payable for purchases of property and
equipment was immaterial as of December 31, 2017, December 31, 2016 and December 31, 2015.
NOTE 5: ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist
of the following:
December 31,
|
|
2017
|
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Accrued payroll and related expenses
|
|
$
|
3,116
|
|
|
$
|
2,381
|
|
Accrued sales incentives and discounts
|
|
|
3,969
|
|
|
|
4,155
|
|
Accrued warranty costs
|
|
|
5,373
|
|
|
|
4,629
|
|
Deferred revenue
|
|
|
864
|
|
|
|
416
|
|
Other
|
|
|
677
|
|
|
|
658
|
|
Total accrued expenses and other liabilities
|
|
$
|
13,999
|
|
|
$
|
12,239
|
|
NOTE 6: INCOME TAXES
On December 22, 2017, the President signed
into law the Tax Cuts and Jobs Act (“the Act”), which took effect on January 1, 2018. Some notable provisions of the
Act include a reduction of the corporate income tax rate from 35 percent to 21 percent, a one-time transition tax on un-repatriated
foreign earnings and profits, adjustments to deductible compensation paid to our executive officers, and 100 percent bonus depreciation
on capital expenditures. Under the accounting rules, companies are required to recognize the effects of changes in tax laws and
tax rates on deferred tax assets and liabilities in the period in which the new legislation is enacted. As a result, as of December
31, 2017, the Company recorded a discrete tax provision adjustment of $1.7 million from revaluing the Company’s net deferred
tax assets. The Company did not record any adjustments related to un-repatriated foreign earnings and profits because the Company
is primarily U.S. based and has no significant foreign entities or activities. We believe that the adjustments resulting from these
components of the Act are complete as of December 31, 2017.
However, the Company has not completed its
accounting for the income tax effects of the Act as it pertains to the deduction for executive compensation, including the impact
for compensation that is paid pursuant to a binding contract that would have been deductible under the prior rules. Due to the
complexity of this provision, additional time is needed to further analyze our executive compensation program, exceptions under
the binding contract rule, the impact of vesting of restricted stock grants, dividends, and bonuses.
The ultimate impact of the Act may differ
from the recorded amounts due to changes in our interpretations and assumptions, as well as additional regulatory guidance that
may be issued. We expect to complete the accounting for tax reform with the completion of our 2017 Federal income tax return, expected
to be complete by the third quarter 2018.
Also in 2017, the Company adopted the amendments
of ASU 2016-09 that required excess tax benefits and deficiencies related to the vesting of restricted stock to be recognized as
a component of income tax expense rather than in equity. This resulted in a beneficial discrete adjustment of approximately $718
thousand to the provision for income taxes in 2017.
The following table lists the components
of the provision for income taxes:
Years ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
8,623
|
|
|
$
|
7,263
|
|
|
$
|
5,056
|
|
State
|
|
|
546
|
|
|
|
261
|
|
|
|
300
|
|
Deferred (benefit) provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,511
|
|
|
|
(507
|
)
|
|
|
1,256
|
|
State
|
|
|
8
|
|
|
|
(355
|
)
|
|
|
53
|
|
Total income tax provision
|
|
$
|
10,688
|
|
|
$
|
6,662
|
|
|
$
|
6,665
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
A reconciliation between the federal statutory
rate and Marine Products’ effective tax rate is as follows:
Years ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
|
|
1.1
|
|
|
|
0.7
|
|
|
|
0.8
|
|
Research and experimentation credit
|
|
|
(0.8
|
)
|
|
|
(1.0
|
)
|
|
|
(1.1
|
)
|
Tax-exempt interest
|
|
|
(0.2
|
)
|
|
|
(0.4
|
)
|
|
|
(0.4
|
)
|
Tax-exempt gain on SERP assets
|
|
|
(0.6
|
)
|
|
|
(1.3
|
)
|
|
|
(0.1
|
)
|
Manufacturing deduction
|
|
|
(3.0
|
)
|
|
|
(3.0
|
)
|
|
|
(2.5
|
)
|
Change in valuation allowance
|
|
|
(0.1
|
)
|
|
|
(1.4
|
)
|
|
|
—
|
|
Adjustments related to the Act
|
|
|
5.6
|
|
|
|
—
|
|
|
|
—
|
|
Adjustments related to vesting of restricted stock
|
|
|
(2.4
|
)
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
1.0
|
|
|
|
(0.1
|
)
|
|
|
—
|
|
Effective tax rate
|
|
|
35.6
|
%
|
|
|
28.5
|
%
|
|
|
31.7
|
%
|
Significant components of the Company’s
deferred tax assets and liabilities are as follows:
December 31,
|
|
2017
|
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Warranty costs
|
|
$
|
1,182
|
|
|
$
|
1,643
|
|
Sales incentives and discounts
|
|
|
348
|
|
|
|
725
|
|
Stock-based compensation
|
|
|
611
|
|
|
|
1,015
|
|
Pension
|
|
|
1,406
|
|
|
|
1,993
|
|
Uniform capitalization
|
|
|
47
|
|
|
|
298
|
|
All others
|
|
|
479
|
|
|
|
489
|
|
State credits and NOL’s
|
|
|
6,124
|
|
|
|
5,129
|
|
Valuation allowance
|
|
|
(5,447
|
)
|
|
|
(4,525
|
)
|
Total deferred tax assets
|
|
|
4,750
|
|
|
|
6,767
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
(781
|
)
|
|
|
(1,103
|
)
|
Basis differences in joint venture
|
|
|
(320
|
)
|
|
|
(386
|
)
|
Net deferred tax assets
|
|
$
|
3,649
|
|
|
$
|
5,278
|
|
Total net income tax payments were $9,733,000
in 2017, $6,546,000 in 2016, and $5,797,000 in 2015. As of December 31, 2017, the Company had net operating loss carry forwards
related to state income taxes of approximately $14.3 million and other state credits of approximately $6.9 million (gross) that
will expire between 2018 and 2035. In 2016, the Company released all valuation allowances related to net operating loss carryforwards
due to implemented tax planning strategies. The Company has a valuation allowance against the corresponding deferred tax asset
on all state tax credits because the Company does not expect to utilize them.
The Company’s policy is to record
interest and penalties related to income tax matters as income tax expense. Accrued interest and penalties were immaterial as of
December 31, 2017 and 2016.
During 2017, the Company recognized an increase
in its liability for unrecognized tax benefits related primarily to state income taxes, settlements, and voluntary disclosure agreements.
The liability, if recognized, would affect our effective rate. A reconciliation of the beginning and ending amount of unrecognized
tax benefits is as follows:
|
|
2017
|
|
|
2016
|
|
Balance at January 1
|
|
$
|
15,000
|
|
|
$
|
15,000
|
|
Additions based on tax positions related to the current year
|
|
|
12,000
|
|
|
|
—
|
|
Additions for tax positions of prior years
|
|
|
216,000
|
|
|
|
—
|
|
Balance at December 31
|
|
$
|
243,000
|
|
|
$
|
15,000
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
It is reasonably possible that the amount
of the unrecognized benefits with respect to our unrecognized tax positions will increase or decrease in the next 12 months. These
changes may be the result of, among other things, state tax settlements under voluntary disclosure agreements. However, quantification
of an estimated range cannot be made at this time.
The Company and its subsidiaries are subject
to U.S. federal and state income tax in multiple jurisdictions. In many cases our uncertain tax positions are related to tax years
that remain open and subject to examination by the relevant taxing authorities. The Company’s 2014 through 2017 tax years
remain open to examination. Additional years may be open to the extent attributes are being carried forward to an open year.
NOTE 7: ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consists
of the following:
|
|
Pension
Adjustment
|
|
|
Unrealized
Loss on
Securities
|
|
|
Total
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
(1,899
|
)
|
|
$
|
(2
|
)
|
|
$
|
(1,901
|
)
|
Change during 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before-tax amount
|
|
|
(474
|
)
|
|
|
(83
|
)
|
|
|
(557
|
)
|
Tax benefit
|
|
|
168
|
|
|
|
29
|
|
|
|
197
|
|
Reclassification adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss
|
|
|
54
|
|
|
|
—
|
|
|
|
54
|
|
Net realized loss
|
|
|
—
|
|
|
|
25
|
|
|
|
25
|
|
Total activity in 2016
|
|
|
(252
|
)
|
|
|
(29
|
)
|
|
|
(281
|
)
|
Balance at December 31, 2016
|
|
$
|
(2,151
|
)
|
|
$
|
(31
|
)
|
|
$
|
(2,182
|
)
|
Change during 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before-tax amount
|
|
|
241
|
|
|
|
9
|
|
|
|
250
|
|
Tax expense
|
|
|
(85
|
)
|
|
|
(3
|
)
|
|
|
(88
|
)
|
Reclassification adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss
|
|
|
59
|
|
|
|
—
|
|
|
|
59
|
|
Net realized gain
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
(19
|
)
|
Total activity in 2017
|
|
|
215
|
|
|
|
(13
|
)
|
|
|
202
|
|
Balance at December 31, 2017
|
|
$
|
(1,936
|
)
|
|
$
|
(44
|
)
|
|
$
|
(1,980
|
)
|
NOTE 8: FAIR VALUE MEASUREMENTS
The various inputs used to measure assets
at fair value establish a hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s
assumptions (unobservable inputs). The hierarchy consists of three broad levels as follows:
|
1.
|
Level 1 – Quoted market prices in active markets for identical assets or liabilities.
|
|
2.
|
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments
in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the
market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
3.
|
Level 3 – Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that
market participants would use.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
The following table summarizes the valuation
of financial instruments measured at fair value on a recurring basis on the balance sheet as of December 31, 2017 and 2016:
|
|
Fair Value Measurements at December 31,
2017 with:
|
|
|
|
|
(in thousands)
|
|
Total
|
|
|
Quoted prices in
active markets for
identical assets
|
|
|
Significant
other
observable
inputs
|
|
|
Significant
unobservable
inputs
|
|
|
|
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Obligations
|
|
$
|
13,031
|
|
|
$
|
—
|
|
|
$
|
13,031
|
|
|
$
|
—
|
|
Corporate Obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
13,031
|
|
|
$
|
—
|
|
|
$
|
13,031
|
|
|
$
|
—
|
|
Investments measured at Net Asset Value-
Trading securities
|
|
$
|
6,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2016 with:
|
|
|
|
|
(in thousands)
|
|
Total
|
|
|
Quoted prices in
active markets for
identical assets
|
|
|
Significant
other
observable
inputs
|
|
|
Significant
unobservable
inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Obligations
|
|
$
|
9,330
|
|
|
$
|
—
|
|
|
$
|
9,330
|
|
|
$
|
—
|
|
Corporate Obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
9,330
|
|
|
$
|
—
|
|
|
$
|
9,330
|
|
|
$
|
—
|
|
Investments measured at Net Asset Value-
Trading securities
|
|
$
|
5,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company determines the fair value of
the marketable securities that are available-for-sale through quoted prices for similar instruments in active markets or quoted
prices for identical or similar instruments in markets that are not active. The trading securities are comprised of SERP assets,
as described in Note 10, and are recorded primarily at their net cash surrender values calculated using their net asset values,
which approximate fair value, as provided by the issuing insurance company. S
ignificant observable inputs,
in addition to quoted market prices, were used to value the trading securities. The Company’s policy is to recognize transfers
between levels at the beginning of quarterly reporting periods. For the year ended December 31, 2017 there were no significant
transfers in or out of levels 1, 2 or 3.
The carrying amount of other financial instruments
reported in the balance sheet for current assets and current liabilities approximate their fair values because of the short-term
maturity of these instruments. The Company currently does not use the fair value option to measure any of its existing financial
instruments and has not determined whether or not it will elect this option for financial instruments it may acquire in the future.
NOTE 9: COMMITMENTS AND CONTINGENCIES
Lawsuits
— The Company is a
defendant in certain lawsuits which allege that plaintiffs have been damaged as a result of the use of the Company’s products.
The Company is vigorously contesting these actions. Management, after consultation with legal counsel, is of the opinion that the
outcome of these lawsuits will not have a material adverse effect on the financial position, results of operations or liquidity
of Marine Products.
Dealer Floor Plan Financing
—
To assist dealers in obtaining financing for the purchase of its boats for inventory, the Company has entered into agreements with
various dealers and selected third-party floor plan lenders to guarantee varying amounts of qualifying dealers’ debt obligations.
The Company’s obligation under these guarantees becomes effective in the case of a default under the financing arrangement
between the dealer and the third party lender. The agreements provide for the return of repossessed boats to the Company in new
and unused condition subject to normal wear and tear as defined, in exchange for the Company’s assumption of specified percentages
of the debt obligation on those boats, up to certain contractually determined dollar limits by lender.
There were no material repurchases of inventory
under contractual agreements during 2017 or 2016. Management continues to monitor the risk of additional defaults and resulting
repurchase obligations based in part on information provided by the third-party floor plan lenders and will adjust the guarantee
liability at the end of each reporting period based on information reasonably available at that time.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
The Company currently
has an agreement with one of the floor plan lenders whereby the contractual repurchase limit is to not exceed 16 percent of the
average net receivables financed by the floor plan lender for dealers during the prior 12 month period, which was $12.2 million
as of December 31, 2017. T
he Company has contractual repurchase agreements with additional lenders with an aggregate maximum
repurchase obligation of approximately $6.6 million, with various expiration and cancellation terms of less than one year, for
an aggregate repurchase obligation with all financing institutions of approximately $18.8 million as of December 31, 2017. This
repurchase obligation risk is mitigated by the value of the boat repurchased.
Minimum annual operating lease obligations
with terms in excess of one year, in effect at December 31, 2017, are summarized in the following table:
(in thousands)
|
|
|
|
2018
|
|
$
|
347
|
|
2019
|
|
|
213
|
|
2020
|
|
|
2
|
|
2021
|
|
|
—
|
|
2022
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
Total rental commitments
|
|
$
|
562
|
|
Total rent expense charged to operations
was approximately $353,000 in 2017, $352,000 in 2016 and $135,000 in 2015.
Income Taxes
— The amount
of income taxes the Company pays is subject to ongoing audits by federal and state tax authorities, which often result in proposed
assessments. Other long-term liabilities included the Company’s estimated liabilities for these probable assessments and
totaled approximately $191,000 as of December 31, 2017 compared to $43,000 as of December 31, 2016.
Employment Agreements
— The
Company has an agreement with one employee, that provides for a monthly payment to the employee equal to 10 percent of profits
(defined as pretax income before goodwill adjustments and certain allocated corporate expenses) in addition to a base salary. The
expense under these agreements totaled approximately $4,068,000 in 2017, $4,202,000 in 2016 and $6,411,000 in 2015 and is included
in selling, general and administrative expenses in the accompanying consolidated statements of operations.
NOTE 10: EMPLOYEE BENEFIT PLANS
Supplemental Executive Retirement Plan
(“SERP”)
- The Company permits selected highly compensated employees to defer a portion of their compensation into
the SERP. The SERP assets are invested primarily in company-owned life insurance (“COLI”) policies as a funding source
to satisfy the obligation of the SERP. The assets are subject to claims by creditors, and the Company can designate them to another
purpose at any time. Investments in COLI policies consist of variable life insurance policies of $6.6 million as of December 31,
2017 and $6.0 million as of December 31, 2016. In the COLI policies, the Company is able to allocate assets across a set of choices
provided by the insurance underwriter, including fixed income securities and equity funds. The COLI policies are recorded at their
net cash surrender values, which approximates fair value, as provided by the issuing insurance company, whose Standard & Poor’s
credit rating was A+.
The Company classifies the SERP assets as
trading securities as described in Note 1. The fair value of these assets totaled $6,031,000 as of December 31, 2017 and $5,547,000
as of December 31, 2016. The SERP assets are reported in other assets on the consolidated balance sheets and changes related to
the fair value of the assets are included in selling, general and administrative expenses in the consolidated statements of operations.
Trading gains (losses) related to the SERP assets totaled $470,000 in 2017, $106,000 in 2016 and $(84,000) in 2015. The SERP liabilities
are recorded on the balance sheet in pension liabilities with any change in the fair value of the SERP liabilities recorded as
selling, general and administrative expenses in the consolidated statements of operations.
In connection with death of an executive
officer during 2016, the Company recorded tax free gains of approximately $751 thousand comprised of the following: $556 thousand
generated by the insurance death proceeds under a Company-owned life insurance contract of approximately $1.9 million less cash
surrender value of approximately $1.4 million, and $195 thousand as a result of insurance death benefits from a key-man life insurance
policy. The net gain is reflected as part of selling, general and administrative expenses in 2016.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
Retirement Income Plan
— Marine
Products participates in the tax-qualified, defined benefit, noncontributory, trusteed retirement income plan sponsored by RPC,
Inc. (“RPC”) that covers substantially all employees with at least one year of service prior to 2002.
The Company’s fair value of the plan
assets exceeded the projected benefit obligation for its Retirement Income Plan by $343,000 and thus the plan was over-funded as
of December 31, 2017.
The following table sets forth the funded
status of the Retirement Income Plan and the amounts recognized in Marine Products’ consolidated balance sheets:
December 31,
|
|
2017
|
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
ACCUMULATED BENEFIT OBLIGATION, END OF YEAR
|
|
$
|
6,379
|
|
|
$
|
6,083
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN PROJECTED BENEFIT OBLIGATION:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
6,083
|
|
|
$
|
5,703
|
|
Service cost
|
|
|
—
|
|
|
|
—
|
|
Interest cost
|
|
|
266
|
|
|
|
274
|
|
Actuarial loss
|
|
|
273
|
|
|
|
342
|
|
Benefits paid
|
|
|
(243
|
)
|
|
|
(236
|
)
|
Projected benefit obligation at end of year
|
|
$
|
6,379
|
|
|
$
|
6,083
|
|
CHANGE IN PLAN ASSETS:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
6,032
|
|
|
$
|
5,813
|
|
Actual return on plan assets
|
|
|
933
|
|
|
|
275
|
|
Employer contributions
|
|
|
—
|
|
|
|
180
|
|
Benefits paid
|
|
|
(243
|
)
|
|
|
(236
|
)
|
Fair value of plan assets at end of year
|
|
$
|
6,722
|
|
|
$
|
6,032
|
|
Funded status at end of year
|
|
$
|
343
|
|
|
$
|
(51
|
)
|
December 31,
|
|
2017
|
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF:
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
$
|
343
|
|
|
$
|
—
|
|
Current liabilities
|
|
|
—
|
|
|
|
—
|
|
Noncurrent liabilities
|
|
|
—
|
|
|
|
(51
|
)
|
|
|
$
|
343
|
|
|
$
|
(51
|
)
|
The funded status of the Retirement Income
Plan was recorded in the consolidated balance sheets in pension liabilities as of December 31, 2017 and in other assets as of December
31, 2016.
December 31,
|
|
2017
|
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
AMOUNTS (PRE-TAX) RECOGNIZED IN ACCUMULATED OTHER
COMPREHENSIVE LOSS CONSIST OF:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
2,997
|
|
|
$
|
3,335
|
|
Prior service cost (credit)
|
|
|
—
|
|
|
|
—
|
|
Net transition obligation (asset)
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
2,997
|
|
|
$
|
3,335
|
|
The accumulated benefit obligation for
the Retirement Income Plan as of December 31, 2017 and 2016 has been disclosed above. The Company uses a December 31
measurement date for this qualified plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
Amounts recorded in the consolidated balance
sheet as pension liabilities consist of:
December 31,
|
|
2017
|
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
SERP liability
|
|
$
|
(6,732
|
)
|
|
$
|
(5,563
|
)
|
Funded status of Retirement Income Plan
|
|
|
—
|
|
|
|
(51
|
)
|
Pension liabilities
|
|
$
|
(6,732
|
)
|
|
$
|
(5,614
|
)
|
Marine Products’ funding policy is
to contribute to the Retirement Income Plan the amount required, if any, under the Employee Retirement Income Security Act of 1974.
There were no contributions to the plan during 2017. Contributions to the plan totaled $180,000 during 2016.
The components of net periodic benefit cost
of the Retirement Income Plan are summarized as follows:
Years ended December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost for benefits earned during the period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost on projected benefit obligation
|
|
|
266
|
|
|
|
274
|
|
|
|
259
|
|
Expected return on plan assets
|
|
|
(415
|
)
|
|
|
(406
|
)
|
|
|
(421
|
)
|
Amortization of net loss
|
|
|
91
|
|
|
|
84
|
|
|
|
76
|
|
|
|
$
|
(58
|
)
|
|
$
|
(48
|
)
|
|
$
|
(86
|
)
|
The Company recognized a pre-tax increase
to the funded status in accumulated other comprehensive income of $334,000 in 2017 compared to a pre-tax decrease of $390,000 in
2016 and a pre-tax increase of $195,000 in 2015. There were no previously unrecognized prior service costs during 2017, 2016 and
2015. The pre-tax amounts recognized in other comprehensive income for the years ended December 31, 2017, 2016 and 2015 are summarized
as follows:
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net loss (gain)
|
|
$
|
(242
|
)
|
|
$
|
474
|
|
|
$
|
(119
|
)
|
Amortization of net loss
|
|
|
(91
|
)
|
|
|
(84
|
)
|
|
|
(76
|
)
|
Net transition obligation (asset)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Amount recognized in accumulated other comprehensive income
|
|
$
|
(334
|
)
|
|
$
|
390
|
|
|
$
|
(195
|
)
|
The amounts in accumulated other comprehensive
income expected to be recognized as components of net periodic benefit cost in 2018 are as follows:
(in thousands)
|
|
2018
|
|
Amortization of net loss
|
|
$
|
81
|
|
Prior service cost (credit)
|
|
|
—
|
|
Net transition obligation (asset)
|
|
|
—
|
|
Estimated net periodic cost
|
|
$
|
81
|
|
The weighted average assumptions as of December
31 used to determine the projected benefit obligation and net benefit cost were as follows:
December 31,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
PROJECTED BENEFIT OBLIGATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.05
|
%
|
|
|
4.50
|
%
|
|
|
4.75
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
NET BENEFIT COST:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.50
|
%
|
|
|
4.75
|
%
|
|
|
4.25
|
%
|
Expected return on plan assets
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
The Company’s expected return on assets
assumption is derived from a detailed periodic assessment by its management and investment advisor. It includes a review of anticipated
future long-term performance of individual asset classes and consideration of the appropriate asset allocation strategy given the
anticipated requirements of the plan to determine the average rate of earnings expected on the funds invested to provide for the
pension plan benefits. While the assessment gives appropriate consideration to recent fund performance and historical returns,
the rate of return assumption is derived primarily from a long-term, prospective view. Based on its recent assessment, the Company
has concluded that its expected long-term return assumption of seven percent is reasonable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
The plan’s weighted average asset
allocation at December 31, 2017 and 2016 by asset category along with the target allocation for 2018 are as follows:
Asset Category
|
|
Target
Allocation
for 2018
|
|
|
Percentage of
Plan Assets as of
December 31,
2017
|
|
|
Percentage of
Plan Assets as of
December 31,
2016
|
|
Cash and Cash Equivalents
|
|
|
0% - 3%
|
|
|
|
2.9
|
%
|
|
|
3.3
|
%
|
Domestic Equity Securities
|
|
|
0% - 40%
|
|
|
|
42.3
|
|
|
|
25.5
|
|
International Equity Securities
|
|
|
0% - 20%
|
|
|
|
20.7
|
|
|
|
20.8
|
|
Fixed Income Securities
|
|
|
15% - 25%
|
|
|
|
23.8
|
|
|
|
25.3
|
|
Investments measured at net asset value
|
|
|
0% - 12%
|
|
|
|
10.3
|
|
|
|
25.1
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
The Company’s overall investment strategy
is to achieve a mix of approximately 70 percent of investments for long-term growth and 30 percent for near-term benefit payments,
with a wide diversification of asset types, fund strategies and fund managers. Equity securities primarily include investments
in large-cap and small-cap companies domiciled domestically and internationally. Fixed-income securities include corporate bonds,
mortgage-backed securities, sovereign bonds, and U.S. Treasuries. Other types of investments include real estate funds and private
equity funds that follow several different investment strategies. For each of the asset categories in the pension plan, the investment
strategy is identical – maximize the long-term rate of return on plan assets with an acceptable level of risk in order to
minimize the cost of providing pension benefits. The investment policy establishes a target allocation for each asset class which
is rebalanced as required. The plan utilizes a number of investment approaches, including but not limited to individual market
securities, equity and fixed income funds in which the underlying securities are marketable, and debt funds to achieve this target
allocation. Company management expects to make a contribution to the pension plan of approximately $100,000 during fiscal year
2018.
Some of our assets, primarily our private
equity and real estate funds, do not have readily determinable market values given the specific investment structures involved
and the nature of the underlying investments. For plan asset reporting as of December 31, 2017, publicly traded asset pricing was
used where possible. For assets without readily determinable values, estimates were derived from investment manager statements
combined with discussions focusing on underlying fundamentals and significant events. Additionally, these investments are valued
based on the net asset value per share calculated by the funds in which the plan has invested and the valuation is based on significant
non-observable inputs which do not have a readily determinable fair value. These assets have been excluded from the fair value
hierarchy applied retrospectively based on the accounting guidance recently adopted. The valuations are subject to judgments and
assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company
seeks to mitigate these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the
financial data included in the funds’ financial statements for reasonableness.
The following tables present our plan assets
using the fair value hierarchy as of December 31, 2017 and 2016. The fair value hierarchy has three levels based on the reliability
of the inputs used to determine fair value. See Note 8 for a brief description of the three levels under the fair value hierarchy.
Fair Value Hierarchy as of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments (in thousands)
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
Cash and Cash Equivalents
|
|
|
(1
|
)
|
|
$
|
192
|
|
|
$
|
192
|
|
|
$
|
—
|
|
Fixed Income Securities
|
|
|
(2
|
)
|
|
|
1,601
|
|
|
|
—
|
|
|
|
1,601
|
|
Domestic Equity Securities
|
|
|
(3
|
)
|
|
|
2,844
|
|
|
|
1,047
|
|
|
|
1,797
|
|
International Equity Securities
|
|
|
(4
|
)
|
|
|
1,394
|
|
|
|
—
|
|
|
|
1,394
|
|
Total Assets in the Fair Value Hierarchy
|
|
|
|
|
|
$
|
6,031
|
|
|
$
|
1,239
|
|
|
$
|
4,792
|
|
Investments measured at Net Asset Value
|
|
|
|
|
|
|
691
|
|
|
|
|
|
|
|
|
|
Investments at Fair Value
|
|
|
|
|
|
$
|
6,722
|
|
|
|
|
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
Fair Value Hierarchy as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments (in thousands)
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
Cash and Cash Equivalents
|
|
|
(1
|
)
|
|
$
|
200
|
|
|
$
|
200
|
|
|
$
|
—
|
|
Fixed Income Securities
|
|
|
(2
|
)
|
|
|
1,529
|
|
|
|
—
|
|
|
|
1,529
|
|
Domestic Equity Securities
|
|
|
(3
|
)
|
|
|
1,539
|
|
|
|
775
|
|
|
|
764
|
|
International Equity Securities
|
|
|
(4
|
)
|
|
|
1,252
|
|
|
|
—
|
|
|
|
1,252
|
|
Total Assets in the Fair Value Hierarchy
|
|
|
|
|
|
$
|
4,520
|
|
|
$
|
975
|
|
|
$
|
3,545
|
|
Investments measured at Net Asset Value
|
|
|
|
|
|
|
1,512
|
|
|
|
|
|
|
|
|
|
Investments at Fair Value
|
|
|
|
|
|
$
|
6,032
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cash and cash equivalents, which are used to pay benefits and plan administrative expenses, are held in Rule 2a-7 money market
funds.
|
|
(2)
|
Fixed income securities are primarily valued using a market approach with inputs that include broker quotes, benchmark yields,
base spreads and reported trades.
|
|
(3)
|
Domestic equity securities are valued using a market approach based on the quoted market prices of identical instruments in
their respective markets.
|
|
(4)
|
International equity securities are valued using a market approach based on the quoted market prices of identical instruments
in their respective markets.
|
The Company estimates that the future benefits
payable for the Retirement Income Plan over the next ten years are as follows:
(in thousands)
|
|
|
|
2018
|
|
$
|
297
|
|
2019
|
|
|
303
|
|
2020
|
|
|
293
|
|
2021
|
|
|
298
|
|
2022
|
|
|
295
|
|
2023-2027
|
|
$
|
1,657
|
|
401(k) Plan
— Marine Products
participates in a defined contribution 401(k) plan sponsored by RPC that is available to substantially all full-time employees
with more than 90 days of service. This plan allows employees to make tax-deferred contributions of up to 25 percent of their annual
compensation, not exceeding the permissible deduction imposed by the Internal Revenue Code. The Company matches 50 percent of each
employee’s contributions that do not exceed six percent of the employee’s compensation, as defined by the 401(k) plan.
Employees vest in the Company’s contributions after three years of service. The charges to expense for Marine Products’
contributions to the 401(k) plan were approximately $317,000 in 2017, $270,000 in 2016 and $250,000 in 2015.
Stock Incentive Plan
— The Company
reserved 3,000,000 shares of common stock under the 2014 Stock Incentive Plan with a term of ten years expiring in April 2024.
All future equity compensation awards by the Company will be issued under the 2014 plan. This plan provides for the issuance of
various forms of stock incentives, including among others, incentive and non-qualified stock options and restricted shares. As
of December 31, 2017, there were approximately 2,062,600 shares available for grant.
The Company recognizes compensation expense
for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these
awards will be based on their fair value at grant date less the cost of estimated forfeitures. Forfeitures are estimated at the
time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. Cash flows related to share-based
awards to employees that result in tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) are
classified as financing cash flows.
Pre-tax stock-based employee compensation
expense was approximately $2,682,000 ($1,729,000 after tax) for 2017, $2,624,000 ($1,692,000 after tax) for 2016 and $1,993,000
($1,285,000 after tax) for 2015.
Stock Options
— Stock options
are granted at an exercise price equal to the fair market value of the Company’s common stock at the date of grant except
for grants of incentive stock options to owners of greater than 10 percent of the Company’s voting securities which must
be made at 110 percent of the fair market value of the Company’s common stock. Options generally vest ratably over a period
of five years and expire in 10 years, except to owners of greater than 10 percent of the Company’s voting securities, which
expire in five years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
The Company estimates the fair value of
stock options as of the date of grant using the Black-Scholes option pricing model. The Company has not granted stock options
to employees since 2004.
There were no options exercised in 2017
and there have been no stock options outstanding since December 31, 2014. There was no tax benefit associated with the exercise
of non-qualified stock options during 2017, 2016 or 2015.
Restricted Stock
— Marine Products
grants selected employees time lapse restricted stock that vest after a certain stipulated number of years from the grant date,
depending on the terms of the issue. The Company has currently issued time lapse restricted shares that vest in 20 percent increments
starting with the second anniversary of the grant, over the six year period beginning on the date of grant. During these years,
grantees receive all dividends declared and retain voting rights for the shares.
The agreements under which the restricted
stock is issued provide that shares awarded may not be sold or otherwise transferred until restrictions established under the stock
plans have lapsed. Upon termination of employment from the Company, with the exception of death (fully vests), disability or retirement
(partially vests based on duration of service), shares with restrictions are forfeited in accordance with the plan.
The following is a summary of the changes
in non-vested restricted shares for the year ended December 31, 2017:
|
|
Shares
|
|
|
Weighted Average
Grant-Date Fair
Value
|
|
Non-vested shares at January 1, 2017
|
|
|
1,200,900
|
|
|
$
|
6.58
|
|
Granted
|
|
|
202,400
|
|
|
|
13.39
|
|
Vested
|
|
|
(344,250
|
)
|
|
|
6.92
|
|
Forfeited
|
|
|
(18,250
|
)
|
|
|
8.47
|
|
Non-vested shares at December 31, 2017
|
|
|
1,040,800
|
|
|
$
|
7.76
|
|
The following is a summary of the changes
in non-vested restricted shares for the year ended December 31, 2016:
|
|
Shares
|
|
|
Weighted Average
Grant-Date Fair
Value
|
|
Non-vested shares at January 1, 2016
|
|
|
1,254,200
|
|
|
$
|
6.80
|
|
Granted
|
|
|
371,950
|
|
|
|
5.77
|
|
Vested
|
|
|
(422,533
|
)
|
|
|
6.52
|
|
Forfeited
|
|
|
(2,717
|
)
|
|
|
6.21
|
|
Non-vested shares at December 31, 2016
|
|
|
1,200,900
|
|
|
$
|
6.58
|
|
The fair value of restricted stock awards
is based on the market price of the Company’s stock on the date of grant and is amortized to compensation expense on a straight
line basis over the requisite service period. The weighted average grant date fair value of these restricted stock awards was $13.39
in 2017, $5.77 in 2016 and $7.08 in 2015. The total fair value of shares vested was approximately $4,432,032 in 2017, $2,686,000
in 2016 and $2,254,000 during 2015.
Pursuant to the adoption of ASU 2016-09
in 2017, the excess tax benefits realized from tax compensation deductions in excess of compensation expense have been reflected
as follows:
|
•
|
Approximately $718,000 during 2017 has been recorded as a discrete tax adjustment and classified within operating activities
as part of net income in the consolidated statements of cash flows; and
|
|
•
|
Approximately $160,000 during 2016 were credited to capital in excess of par value and classified within financing activities
as an inflow in addition to being disclosed as an outflow within operating activities in the consolidated statements of cash flows.
|
Other Information
— As
of December 31, 2017 total unrecognized compensation cost related to non-vested restricted shares was approximately $6,458,000
which is expected to be recognized over a weighted-average period of 3.2 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marine Products Corporation and Subsidiaries
Years ended December 31, 2017, 2016 and 2015
NOTE 11: RELATED PARTY TRANSACTIONS
In conjunction with its spin-off from RPC
in 2001, the Company and RPC entered into various agreements that define the companies’ relationship after the spin-off.
The Transition Support Services Agreement
provides for RPC to provide certain services, including financial reporting and income tax administration, acquisition assistance,
etc., to Marine Products until the agreement is terminated by either party. Marine Products reimbursed RPC for its estimated allocable
share of administrative costs incurred for services rendered on behalf of Marine Products totaling $849,000 in 2017, $739,000 in
2016 and $753,000 in 2015. The Company’s payable due to RPC for these services was $47,000 as of December 31, 2017 and $60,000
as of December 31, 2016. The Company’s directors are also directors of RPC and all of the Company’s executive officers
are employees of both the Company and RPC.
The Employee Benefits Agreement provides
for, among other things, the Company’s employees to continue participating subsequent to the spin-off in two RPC sponsored
benefit plans, specifically, the defined contribution 401(k) plan and the defined benefit retirement income plan.
RPC and Marine Products own 50 percent each
of a limited liability company called 255 RC, LLC that was created for the joint purchase and ownership of a corporate aircraft.
The purchase of the aircraft was completed in January 2015, and the purchase was funded primarily by a $2,554,000 contribution
by each company to 255 RC, LLC. Each of RPC and Marine Products is a party to an operating lease agreement with 255 RC, LLC
for a period of five years. During 2017, Marine Products recorded certain net operating costs comprised of rent and an allocable
share of fixed costs of approximately $157,000 for the corporate aircraft. The Company accounts for this investment using the equity
method and its proportionate share of income or loss is recorded in selling, general and administrative expenses. As of December
31, 2017, the investment closely approximates the underlying equity in the net assets of 255 RC, LLC.
A group that includes the Company’s
Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also director of the Company, and certain companies
under their control, controls in excess of fifty percent of the Company’s voting power.